The New Uniform Prudent Management of Institutional Funds Act

November 3, 2008

The Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), and its predecessor Uniform Management of Institutional Funds Act (“UMIFA”), were designed by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) to provide guidance and authority to charitable organizations concerning the management, investment, expenditure, and delegation of management and investment duties of funds held by such organizations. UMIFA, which was approved by NCCUSL in 1972, was enacted in forty-seven states. UPMIFA, which was approved by NCCUSL in 2006, has been enacted by twenty-four states and the District of Columbia so far and introduced as legislation in eight other states.

Like UMIFA, UPMIFA applies to all charitable organizations except charitable trusts that are managed by a commercial or individual trustee rather than a charity. UPMIFA expands on UMIFA and provides a more unified basis for charitable fund management by adding express standards for management and investment decisions, expenditure decisions, and the delegation of management and investment duties. UPMIFA also changes the ability to release or modify restrictions on funds. UPMIFA is retroactive and applies to already existing funds held in any form. However, UPMIFA only governs decisions made or actions taken after its enactment date.

Management and Investment. UMIFA required an institution to exercise ordinary business care and prudence in making investment decisions. UPMIFA modifies this general obligation to direct a charity to consider its management and investment decisions in relation to the whole economic situation of the institution and its charitable purposes. It enumerates eight factors for consideration in management and investment decisions, including (1) general economic conditions, (2) the possible effects of inflation or deflation, (3) the expected tax consequences, (4) the relation of each investment to the entire portfolio, (5) the expected total return, (6) other resources of the institution, (7) the need for distributions and preservation of capital, and (8) any special relationship of the asset to the institution’s charitable purposes.

UPMIFA also adds several requirements to UMIFA. UPMIFA requires prudence in cost management and allows only “appropriate and reasonable” costs. It adds a duty to investigate the information used in management and investment decisions. It allows institutions to pool funds for investment and management purposes. It emphasizes that investment decisions must be made in relation to the whole portfolio. UPMIFA requires diversification of assets and re-balancing of the portfolio after receiving new assets. For advisors with special skills, it raises the standard of care to a level consistent with those skills.

Expenditures. UPMIFA updates the rules governing expenditures to acknowledge changes in asset management theory and practice. Whereas UMIFA limited expenditures to the historic dollar value, UPMIFA abolishes the historic dollar value limitation on expenditure. The retroactivity of UPMIFA allows institutions to avoid having to use multiple accounting systems for the same fund. UMIFA allowed only the net appreciation to be spent for the purposes of an endowment, but UPMIFA authorizes a prudent total return expenditure standard. This more precise standard requires an institution to act in good faith with the care of an ordinarily prudent person in like circumstances after consideration of seven factors, similar to those applying to management and investment decisions. The factors include (1) the fund’s duration, (2) the fund’s and institution’s purposes, (3) general economic conditions, (4) the effects of inflation or deflation, (5) the expected total return, (6) other resources that are available to the institution, and (7) the institution’s investment policy.

As drafted by the NCCUSL, UPMIFA includes an optional provision that creates a rebuttable presumption of imprudence if expenditures go over 7% of a fund’s fair market value averaged over a period of at least the last three years. Of the twenty-five enactments of UPMIFA so far, only seven states have included this optional provision.

Delegation. Under UMIFA, an institution was permitted to delegate management and investment decisions without being held to an express standard in such delegations. UPMIFA sets forth the standard of acting in good faith with the care of a prudent person. This standard applies to the selection of an agent, the establishment of the scope and the terms of the delegation, the supervision of the agent, and the periodic review of the delegation. UPMIFA expressly states that the agent has a duty of reasonable care and is subject to the jurisdiction of the court of the state in all proceedings related to the delegation or the agent’s performance. UPMIFA also specifically permits delegation to an institution’s officers, committees, or employees, as may be authorized by the state’s other laws.

Restrictions. In general, UMIFA and UPMIFA both respect the donor’s intent by allowing donors to express restrictions in the gift instrument. UPMIFA emphasizes this respect for the donor’s intent by allowing the gift instrument to restrict or modify any of the provisions in UPMIFA regarding management, investment, and expenditure decisions and delegation of such decisions.

UMIFA provided for the ability of a court to release such a restriction on a fund, but only if the restriction was obsolete, inappropriate, or impracticable. UPMIFA expands this ability and allows a court to release or modify a restriction if it is impracticable or wasteful, if it impairs the management or investment of the fund, or if because of unanticipated circumstances the purpose would be furthered by modification. UPMIFA also allows the purpose of a fund to be modified by a court if the purpose becomes unlawful, impracticable, impossible, or wasteful. In all situations, UPMIFA includes the same requirement as UMIFA of notice to the Attorney General.

UPMIFA also adds a new ability of an institution to release or modify a restriction on a fund without involvement of the court if the fund is of a certain size, has been held for a certain number of years, and continues to be used in a manner consistent with the original purpose. The institution is only required to give notice to the Attorney General sixty days in advance of the release or modification. UPMIFA suggests that the value of the fund be less than $25,000 and the number of years be twenty, but these numbers may be determined by each state enacting UPMIFA.

These sections of UPMIFA clarify that the doctrines of cy pres and deviation apply to funds held by nonprofit corporations as well as to funds held by charitable trusts. In general, the Attorney General continues to be the protector of donor’s intent and the public’s interest in charitable funds since neither UPMIFA nor UMIFA require an institution to notify the donor before the release or modification of a restriction.

Overall, UPMIFA upgrades UMIFA by strengthening the rules governing the management, investment, and expenditure decisions regarding charitable funds and providing more guidance to charitable institutions. More information is available at www.upmifa.org.

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